Tuesday, September 27, 2011

Barack Obama was in full campaign mode when he berated attendees at the Congressional Black Caucus legislative forum in Washington. Its was ironic that in a speech to blacks that they should support him and his jobs package, the media ignored two things. First, there were a hundred protestors walking around silently wearing t-shirts saying “got jobs?”. Second, Obama was wearing a tuxedo! Certainly not the image conveying poverty, unemployment and need. Here is some of Obama’s speech.

"But we got to work. With your help, we started fighting our way back from the brink. And at every step of the way, we’ve faced fierce opposition based on an old idea - the idea that the only way to restore prosperity can’t just be to let every corporation write its own rules, or give out tax breaks to the wealthiest and the most fortunate and to tell everybody that they're on their own," he said. "There has to be a different concept of what America's all about. It has to be based on the idea that I am my brother’s keeper, and I am my sister’s keeper, and we’re in this together. We are in this thing together."
"Against all sorts of setbacks, when the opposition fought us with everything they had, we finally made clear that in the United States of America nobody should go broke because they get sick. We are better than that. Today, insurance companies can no longer drop or deny your coverage for no good reason. In just a year and a half, about one million more young adults have health insurance because of this law," he said. "So in these hard years, we’ve won a lot of fights that needed fighting, and we’ve done a lot of good. But we’ve got more work to do. So many people are still hurting. So many people are still barely hanging on. And too many people in this city are still fighting us every step of the way."
"I need your help. We have to do more to put people to work right now. We’ve got to make that everyone in this country gets a fair shake, and a fair shot and a chance to get ahead. And I know we won’t get where we need to go if we don’t travel down this road together. I need you with me.”
"I don’t know about you, CBC, but the future rewards those who press on. With patient and firm determination, I am going to press on for jobs. I'm going to press on for equality. I'm going to press on for the sake of our children. I'm going to press on for the sake of all those families who are struggling right now. I don’t have time to feel sorry for myself. I don’t have time to complain. I am going to press on."
"I expect all of you to march with me and press on," Obama said. "Take off your bedroom slippers. Put on your marching shoes. Shake it off. Stop complaining. Stop grumbling. Stop crying. We are going to press on. We’ve got work to do, CBC."

Personally I don’t understand the bedroom slippers comment but I marveled at the berating of his audience. Rep. Maxine Waters, a member of the Congressional Black Caucus and one of the most liberal members in Congress said "I don't know who he was talking to because we're certainly not complaining. I found that language a bit curious because the president spoke to the Hispanic Caucus, and certainly they're pushing him on immigration... he certainly didn't tell them to stop complaining," she said. "And he would never say that to the gay and lesbian community, who really pushed him on Don't Ask, Don't Tell." Say what you will about Maxine Waters but in this case, she got it right.

This morning was a posting on Mises Daily (http://mises.org/daily/5688/Twist-Again)

Twist? Again?
by Christopher Westley on September 26, 2011
Do you remember when,
Things were really hummin',
Yeaaaah, let's twist again,
Twistin' time is here!

So crooned that 1960s social philosopher, Chubby Checker, hoping to extend the popularity of the dance craze he started in a follow-up song urging the kiddies buying his music to do it again for another year. It was a successful twist on the Twist; his sequel, "Let's Twist Again" won the Grammy for best rock recording.

They twisted like crazy in 1961. And it wasn't just Chubby and his followers.

William McChesney Martin, the epitome of the boring-by-design Fed chairman, came up with a twist of his own. His "Operation Twist" involved purchasing long-term bonds with the proceeds resulting from the sale of short-term bonds during the first year of the Kennedy administration. Essentially rearranging the Fed's portfolio, the arch-Democrat, whose father helped write the Federal Reserve Act for Woodrow Wilson, attempted to thwart the effects of his monetary expansions on long-term interest rates.

A Yale student at the height of Irving Fisher's fame, Martin knew one of the effects of monetary inflation is an upward pressure on interest rates. Lenders tend to require higher rates of return when they expect the price level to rise. After all, they loan purchasing power and want to be paid back with at least the same amount of purchasing power in the future.

So when I loan you a dollar today, I am actually loaning you the goods you can buy with that dollar. However, I am worse off if the dollar paid back can be exchanged for fewer goods because prices have risen. That's why, if I expect prices to rise, I am more likely to require a higher rate of interest.

But I'd have a harder time charging a higher rate if the Fed is able to force down rates by buying up a bunch of loans in the same category as mine. Such actions counter the "Fisher effect" we teach in macroeconomics. It states that there is a positive relationship between expected inflation and nominal interest rates.

"Clearly, Benanke's policy gun is out of bullets."
By twisting the Fed's portfolio, Martin attempted the monetary equivalent of having one's cake and eating it too. He wanted the Fed to engage in the inflation desired by the political class — to finance the 1960s version of welfare and warfare spending — without inflicting on the country the adverse effects that follow money printing, including rising rates.

The verdict of the economics establishment on this episode is that Martin's time would have been better spent practicing the Twist than implementing Operation Twist. The research indicates a small effect on interest rates. One paper coauthored by future Nobel laureate Franco Modigliani argued that the purchases were too small and spread out over too long of a time period to have a significant effect on long-term rates.

This literature is well-known to Ben Bernanke. The current Fed chair included it in a 2004 paper he coauthored studying possible Fed policies at a time when normal open-market operations are hindered by a zero lower bound federal funds rate. Yet, 50 years later, twistin' time is here again. Buoyed by new research by San Francisco Fed economist Eric Swanson, Bernanke plans on selling about $400 billion in short-term Treasuries and buying longer-term Treasuries with the proceeds, within the next nine months.

Clearly, Benanke's policy gun is out of bullets. His grasping at a new Operation Twist underscores the sense of impotence of Fed policies that have today brought low growth, high unemployment, and a 7.2 percent increase in producer prices over the last 12 months. Its attempts at stabilization have instead wrought chaos both in the United States and overseas, reflecting what happens when, on the outset of a recession, policies are implemented to avoid correction with an infusion of trillions of dollars of new money.

Similar massive interventions, especially on the fiscal side, are what caused a market correction in 1929 to drag into a 17-year contraction. The powers responsible for that episode also tried to mask their impotence with Twist-like gimmicks as well.

It's possible that today the public is catching on. We are far away from 1961. For proof, consider the scrutiny placed on Bernanke's job performance compared to that received by William McChesney Martin.

Martin, of course, was virtually unknown in the popular mind, thanks in part to a large establishmentarian media characterized by three television networks. Bernanke, in contrast, has to deal with the fact that even MSNBC was so underwhelmed by his Twist that it decided to discuss it with Chubby Checker himself.

"The Twist has always meant money for everybody," the 69-year old gushed to his hosts, presumably referring to the song, not the Fed policy tool. If not, then Checker's confusion of money with real wealth suggests he has more in common with central bankers than he realizes.

Christopher Westley is an adjunct scholar at the Ludwig von Mises Institute. He teaches in the College of Commerce and Business Administration at Jacksonville State University.

Monday, September 26, 2011

We are rapidly approaching the time when it is traditional for the sitting president to unveil the portraits of the previous president and first lady. I, for one, am waiting to see what transpires. George Bush was one of most most gracious politicians we have seen. Perhaps I have a short memory but I cannot recall him engaging in partisan rancor while in the White House. Obama, on the other hand, has been anything but presidential in his behavior conducting open class warfare against the republicans. Consider the speech given by Bush when the Clinton portraits were unveiled on June 14, 2004 (http://www.washingtonpost.com/wp-dyn/articles/A40563-2004Jun14.html). President Bush said Clinton demonstrated "incredible energy and great personal appeal" as a candidate for public office. "As chief executive, he showed a deep and far-ranging knowledge of public policy, a great compassion for people in need, and the forward-looking spirit that Americans like in a president. Bill Clinton could always see a better day ahead -- and Americans knew he was working hard to bring that day closer. Over eight years, it was clear that Bill Clinton loved the job of the presidency. He filled this house with energy and joy. He's a man of enthusiasm and warmth, who could make a compelling case and effectively advance the causes that drew him to public service. And meeting those expectations took more than charm and intellect -- it took hard work and drive and determination and optimism and after all, you've got to be optimistic to give six months of your life running the McGovern campaign in Texas." Bush noted some of Clinton's other accomplishments, including his standing as the first Democrat to win reelection to the White House since Franklin D. Roosevelt. "And I could tell you more of the story, but it's coming out in fine bookstores all over America," Bush added to laughter and applause in what amounted to a plug for Clinton's forthcoming memoir.Bush also heaped praise on Hillary Rodham Clinton, currently a Democratic senator from New York and a favorite target of conservatives.Calling her "a woman greatly admired in our country," Bush said Sen. Clinton "inspires respect and loyalty from those who know her, and it was a good day in both their lives when they [the Clintons] met at the . . . Yale Law School Library." Of course, Hillary Clinton a year later called the Bush administration ""a culture of corruption, we have cronyism, we have incompetence," she said. "I predict to you that this administration will go down in history as one of the worst that has ever governed our country." I predict that Obama will be equally gracious.

How do you ignore stupidity? For two years, first three American hikers – later reduced to two – were held in Iran accused of spying. First, the Iranians are stupid (we knew that already) thinking that three young Americans wandering around the Iranian countryside could find out anything valuable. Standing out like a sore thumb. certainly they could not blend in and pass among the natives. Obviously they were lost. I can relate, having gotten lost on the property adjacent to my farm while following a blood trail while bow hunting. I now carry both a compass and a GPS in my backpack. I am assuming that these hikers somehow forgot their GPS. The basic question is what were they doing hiking near the Iranian border in the first place? I can think of thousands of places of great hikes that are nowhere near Iran. So it is hard to think that these three didn’t know what they were doing. Perhaps they were mindless thrill seekers. The cynic in me says that they knew exactly what they were doing and will now try to cash in with TV appearances and book deals. We have just gotten a taste of their grandstanding in their weepy blasting of the Iranians for their treatment during detention. It almost makes you feel sorry for Mahmoud Ahmadinejad. The money they are paid should be forwarded to reimburse the costs incurred by their sheer stupidity. They should be sent a bill for all the costs incurred trying to get them out of jail. I have no idea what the total costs were but the $1 million ransom paid to the Iranians would be just a start.

Here we go again. Our hyperactive Fed has announced Operation Twist. It is a repeat of 1961 where the Fed tried without much success to flatten the yield curve by buying long term bonds while selling short term bills. In those days one of the purposes was to lower the cost of the government debt. Today the Fed is supposed to be trying to lower long term rates in order (it is said) to push mortgage rates even lower in an effort to boost housing. I find this hard to believe. Mortgage rates are already extremely low and the housing market is essentially flat. Until consumer sentiment turns up and the economy recovers, housing will still stagnate. Personally I think that the Fed feels obligated to seem like it is trying to do something and I seriously doubt if even Bernanke is confident that this Operation Twist will do any good. The reality is that the Fed once it committed itself to aggressive discretionary policy finds that it must keep easing or else market forces will cause rates to rise. I learned this in graduate school in the 1960s and it is still true today. Consider that the Fed has injected over $1 trillion in liquidity into the banking system. That money has piled up in excess reserves. Given the paucity of consumer demand for borrowing, the banks can earn interest just by leaving it in reserves without incurring additional risk. Bankers have told me that their regulators - ironically including the Fed - have hammered them on their lending decisions and have nitpicked their loans actually discouraging them from lending. Now the banks can borrow at virtually zero interest and lend the money back to the Fed. What Bernanke is doing is making the fundamental mistake in thinking that interest rates are the major determinant of lending and borrowing decisions. It is not. Borrowers will borrow at higher rates if demand is high enough to be profitable and will not borrow at low rates if there is little demand for the final products. The Fed should know this. When the recession started I wrote that the best Fed policy was to do nothing. The same is true today. We are ion this mess largely due to misguided monetary policy. Just like the country needs another Ronald Reagan, the Fed needs another Paul Volcker.

Tuesday, September 20, 2011

In the president’s continuing conduct of class warfare on higher income earning Americans, he proclaimed “Either we ask the wealthiest Americans to pay their fair share in taxes or we’re going to have to ask seniors to pay more for Medicare. We can’t afford to do both. This is not class warfare, it’s math”. Of course it is class warfare and it is evident that the same group of teachers that taught him economics must have also taught him mathematics. What the president is doing is saying that instead of having a spending problem we have a revenue problem. Nothing could be further from the truth. But framing the argument by blaming the “wealthiest Americans” is campaign rhetoric and decidedly unpresidential. It is time to call the president out and demand what does he mean by “pay their fair share”. We know that he has latched on the catch phrase “millionaires and billionaires” and as part of the new math has defined that group to include those who earn $200,000 and more. Why doesn’t he get asked how $200,000 equates to being a millionaire? Obviously, the president has flunked math by leaving off a zero. However, no one has asked him to define “fair share”. We all know that this group pays the vast majority of federal income taxes and the only group not paying its “fair share” is the 47 percent of wage earners who pay no federal income tax at all. Perhaps he is alluding to Warren Buffet when he says that hedge fund managers pay less than their secretaries. Here again is the new math. There is no way that this can be true. Even if you assume that the hedge fund manager is paying at a lower capital gains tax rate when you do the math, the manager is paying much more than the secretary is at the personal income rate. So Obama flunks this math test as well. The third way the president flunks is that he assumes that we are too stupid to do the math. He asserts that if we just raise the taxes on high earnings that the deficit problem will go away. Really? The American Thinker has pointed out (http://www.americanthinker.com/archived-articles/../2011/03/confiscate_americans_wealth_to.html) that if the government confiscated 100 percent of all income over $200,000 per year then the gain to the treasury would be only $221 billion! This means that the confiscation could not even cover the $714 billion spent on antipoverty programs last year. Lastly, as pointed out in EconLog (Obama's budgetary sleight of hand http://econlog.econlib.org/archives/2011/09/obamas_budgetar.html) the president also flunks the math test by double counting budget cuts as well. Thus the president is either bad at mathematics or is a bad liar.

Monday, September 19, 2011

Obamacare is a terrible piece of legislation. It is a bill to take care of a minor problem with insurance and in the process screws up medical care. As Mark Perry has pointed out, US medical care passes the market test with over 500,000 tourists coming here to get care. Why did not those people get care at home? Why did many of them come from managed care countries where it is "free" to pay for it here? The answer is obvious. What needs to be asked is whether those tourists will come here once Obamacare gets fully implemented? I doubt it. What I will do is invest in hospital groups that will set up offshore. If the governments in the Caribbean are smart, they will establish medical sanctuaries much as they have done with banking. One likelihood has been given little attention and is most troublesome. It is that Obamacare limits the tests that doctors can recommend for patients without capping malpractice awards. Although a fairly sizable portion of medical costs is attributed to testing, those tests are not being conducted to enrich the doctors but rather to protect them against malpractice suits. Yet Obamacare does not limit malpractice awards. This means that one of the protections for the doctors is taken away. Without those protections we can expect the doctors to start leaving the profession. Looking at malpractice under managed care in Canada and the UK shows that the doctors are shielded. In the UK where the docs work for the government, the government rather than the doctors defend against the suits. In Canada where the doctors remain in independent practices and are re-imbursed by the government, medical malpractice awards are limited to $300,000. An article in the St. Pete Times (http://www.tampabay.com/news/article1021977.ece) notes that neurosurgeons in Miami pay annual malpractice insurance premiums of $237,000 while in Canada a neurosurgeon in Toronto pays $29,000 and one in Vancouver BC pays only $10,650. Not surprising there were less than 1,000 suits in Canada last year and fewer than 100 went to trial. Without a limit on malpractice awards, removing the allowable tests and trying to control costs by squeezing reimbursements will drive doctors out of practice. So not only will we end up with worse medical care, we will also have worse medical care practiced by worse doctors.

Rick Perry has become a lightening rod. Isn't it interesting that the media seems intent on vilifying whoever is the current conservative frontrunner on the republican side. When Michele Bachmann won the Iowa caucuses, they went after several comments she had made. Now it is Rick Perry they are after for saying that a further easing of money would be akin to treason and calling social security a ponzi scheme. First off Perry may have done us all a favor by calling attention to the Fed. Studies have shown that monetary policy almost always gets easier during the reelection year of an incumbent president regardless of party. Since this Fed has eased like no other lending out over $1 trillion, Bernanke has been put on notice that we all are now watching. It is possible that he would back off anyway. The Open Market Committee is clearly split with the reserve bank presidents taking a less easing policy stance than the governors. There is also the little problem for Bernanke that he will certainly not be reappointed if Obama loses. Given that those prospects are dim, maybe just maybe he will start being less accommodative anyway. By the way, why is it that all the pundits are saying that a conservative like Perry or Bachmann or even Ron Paul could not beat Obama? It seems to me that we are in a state similar to the previous election. George Bush was so unpopular that any democrat would have won. If Obama's numbers do not get out of the 40's he will lose no matter who runs for the republicans. Now back to Rick Perry calling social security a ponzi scheme. Actually social security has giver Charles Ponzi a bad name. A ponzi scheme only works if new "investors" are lured in so that their money goes to pay the old "investors". Eventually Ponzi schemes fail when there is a shortage of new "investors". With social security which is a pay-as-you-go scheme in which current benefits are pay from current "contributions", if there is a shortfall the government can expropriate more funds. As a result the social security tax keeps getting raised as does the income limit. What has been disappointing is that surely all the republican candidates know this and instead of all of them backing Perry and saying the same thing, some are actually attacking him on it. I don't know about you, but I have no enthusiasm for someone who isn't truthful on this issue. All of them should be saying that it is a ponzi scheme and the practical solution is to raise the "retirement" (full benefit) age to make the program financially sound. Then other solutions such as privatization can be phased in.

Wednesday, September 14, 2011

I was asked whether short sales contributed to stock market volatility. My answer was "I don't know" since the research is mixed. There has been a recent paper on the New York Fed's website that links speculative trading to co-movements in global markets. Enjoy. http://libertystreeteconomics.newyorkfed.org/2011/09/can-speculative-trading-magnify-financial-market-co-movement.html

Sunday, September 11, 2011

One of the contenders for dumbest articles of the decade was an article by someone named Eugene Linden in the Los Angeles Times (http://articles.latimes.com/2011/aug/28/opinion/la-oe-linden-climate-20110828). However, what can be expected from a person who wrote "Our brand of capitalism is making us stupid"? That article should be titled "Our brand of capitalism has made me stupid". It shames me to say that my newspaper the Knoxville News-Sentinel decided to devote its entire front page of "Perspective" to this nonsense on September 4. What Linden is saying is that the governors of Texas, Oklahoma and New Mexico have been global warming skeptics yet their states are experiencing severe droughts. I presume Linden is either stupid or thinks that we are stupid. Are we to believe that the current drought is a first time event for those states? Are we to believe that somehow global warming is really Texas, Oklahoma and New Mexico warming? This is utter nonsense assuming somehow "global" warming is state specific. Moreover, Linden expects us to believe that we are able to make a conclusion about global warming from what is occurring at this moment when trends are what are important. Most evidence that I have seen indicates that the earth is actually cooling rather than warming. The polar caps are getting thicker rather than shrinking (sorry Al Gore). Again, how were are supposed to give credence as to what is going to happen in 100 years or more into the future when the same bunch cannot predict tomorrow's weather is beyond me.

This administration is dominated by Keynesians as evidenced in their policies to "create jobs". What has been interesting to observe are their futile efforts, their lack of recognition that those efforts are futile, hence the "we just did not throw enough money at it." Indeed, Maxine Waters (D-CA) said that we need a trillion dollar jobs bill. What the president, his team and people like Rep. Waters refuse to recognize is failure. Such stimulus packages fail because they only evoke a short run and not a long run reaction from economic agents. Studies show that if households know that the stimulus is short term, they will not change expenditure patterns. Rather they use the stimulus to pay down debt. Businesses will do the same. Trying to encourage them to employ more workers will fail unless demand is adequate to keep those workers employed. The previous stimulus did not create new permanent jobs. The people hired, or rehired were terminated when the money went away because there was no change in long term demand. John Maynard Keynes is reported to have said when told that his theories were only relevant in the short term "In the long term we are all dead." So true but the long term is relevant to creating real jobs through policies that are not focused on the short run. I do not expect that this administration is capable of learning this lesson because large scale government is in the DNA of most liberals and the role of government dominates the thinking of Keynesians. For both, it has now become an article of faith and no evidence can dissuade them. One responder to a News-Sentinel article argued that every bit of evidence that I presented could be found lacking or manipulated. I gave up trying. The same is true with Keynesians and sadly the same is true with this administration.

Monday, September 5, 2011

Our president seems to think that he can create green jobs through subsidization. What he does not realize is that if the market will not support the company, then the only way it can survive is through never ending subsidies. The question then becomes whether the government is willing to continually throw funding at money losing enterprises. Here is a lesson on China by Gordon Chang in Forbes.com.

Powerful Chinese bureaucrats are now fighting over the future of China’s green-car industry, with the National Development and Reform Commission and the Ministry of Industry and Information Technology squaring off in public. In July, the NDRC’s Li Gang referred to the “hopeless” prospects of the country’s “garbage technology” for electric cars. MIIT, replying through former official Hou Shiguo, argued that Beijing was not built in a day.
The fierce debate in the Chinese capital was further fueled by Wen Jiabao’s comments in last month’s issue of Qiushi, a leading Communist Party magazine. “It remains uncertain whether hybrid and electric cars, which are now the focus of much of the development, will be the winners in the end,” wrote China’s premier as he listed “problems with their technical path, problems with core technologies, problems with investment, problems with policy support.”

Beijing has bet big on electric vehicles. In fact, no government has devoted more effort and money than China’s, as official media likes to brag. Last year, for instance, Beijing announced plans to spend 100 billion yuan—about $15.6 billion—to put 20 million “green” cars on China’s roads by 2020. Now, just a little more than a year later, the country’s leaders are rethinking their decade-long commitment and have yet to release crucial details.
That looks like a setback for foreign investors, who have rushed into the green-car sector in the last few years. Take Warren Buffett. In September 2008, the “Oracle of Omaha” took a 10% stake in BYD, the Shenzhen-based battery and vehicle maker, for $200 million. The move landed him on the cover of Fortune in 2009, inside the company’s e6 model with the now-famous caption, “Warren Buffett hasn’t just seen the car of the future, he’s sitting in the driver’s seat.”
There’s no question the photo shows him smiling behind the wheel, but the rest of the caption is in dispute. BYD has sold a grand total of 53 e6s since March 2010. Think the story for Buffett couldn’t get worse? Almost all of the sales of the “car of the future” were to a taxi company in Shenzhen of which BYD owns 45%. BYD has done slightly better with its plug-in hybrid model F3DM. Since the car’s February 2009 launch, the company has sold 365 of them.
BYD’s woes mirror those of its home base. Now, Shenzhen has 1,107 electric or hybrid vehicles on its roads—50 taxis, 618 buses, and 439 private cars. The government’s goal for next year is to boost the total to 35,000, of which 25,000 will be privately owned autos.
That goal will undoubtedly be scaled back. A little over 10,000 electric and hybrid vehicles have been sold in all of China in the last two years. Less than a tenth of them went to private owners, with most of the rest going to governments and state enterprises for trials.
The prospect for coming years will be heavily dependent on central government decisions. Since June last year, electric-car sales to private citizens have been aided by government subsidies of as much as 120,000 yuan per vehicle in selected cities, but some inducements are scheduled to come to an end next year. According to the official China Daily, “future policy remains unclear.” Policy is important because surveys show that consumers will not buy electric cars priced far beyond gas-powered ones.
In China, where no sector is too small for large government incentives, it is inconceivable that the government will halt policy support for green vehicles. For one thing, sales growth in the world’s largest vehicle market is slowing fast, and the overcrowded “pillar” industry needs Beijing’s help.

That help will certainly be good news for BYD, “seen widely as the flagbearer for China’s drive into the green-vehicle market.” That also means the success or failure of Buffett’s investment is in the hands of central technocrats.
So what are the prospects for the green-car industry? China Daily says the “country’s developmental roadmap for new-energy vehicles over the next decade is expected to be formally released during the coming months,” but not all agree. Vehicle manufacturers are arguing about policy as are the government agencies involved.
Moreover, the seemingly intractable disputes are aggravated by the general infighting in the run up to the leadership changes to be announced at the Communist Party’s 18th Congress, slated for next fall. While officials jockey for position at the crucial gathering, the country’s policymaking will be generally put on hold.
Finally, central government spending is now constrained by economic factors. Beijing’s blowout stimulus programs since 2008 have resulted in diminished fiscal capacity, and any government expenditure will aggravate the number-one economic problem of the moment, runaway inflation. Officials will surely continue policy support for green vehicles, but to have an effect, they need to devote even more cash than they have in the past.
All these factors mean BYD will be held hostage to politics in the Chinese capital. Buffett once famously advised others not to invest in things they did not understand. At the moment, it’s hard for Buffett—or anyone else—to understand what will happen to electric vehicles in China over the next few years.

I have written before that the Chinese are an enigma. All over the world they are entrepreneurs and capitalists. However, their homeland government is practicing fascism - large government married to large businesses. Given that the masses have largely been bypassed, this has all the makings of a major upheaval. Gordon Chang recently posted this on Forbes.com

6/05/2011 @ 10:16PM |Forbes
Chinese Entrepreneurs Are Leaving China

Gordon G. Chang, Contributor

China’s rich, primarily driven by a sense of insecurity, are taking money out of their country. Many are actually preparing to move elsewhere.
According to a new study, almost 60% of China’s “high net worth individuals,” defined as those possessing more than 10 million yuan in investable assets, are either considering emigration through investment programs or are completing the emigration process. The survey, conducted by China Merchants Bank and Bain & Co., also reports that 27% of those with more than 100 million yuan in investable assets have already emigrated and 47% of them are thinking about leaving the Motherland.

The stunning results correspond to reports that the U.S. Treasury unit monitoring illegal money flows has, since the beginning of last summer, detected a surge in hidden cash transfers out of China.

Almost all of the funds supporting emigration applications were spirited out of China in violation of Beijing’s strict rules. The country leads the world in illicit fund transfers, according to Global Financial Integrity, a nonprofit. The estimated total of China’s outbound flows from 2000 to 2008 was a staggering $2.18 trillion.

The flood of “hot money” leaving China picked up in the last quarter of 2008. That was when the Chinese central government announced its stimulus plan, which initiated a new phase in the partial renationalization of the economy. Then, Premier Wen Jiabao started pouring state cash into the state sector and state financial institutions began diverting credit to state-sponsored infrastructure. As a result of the stimulus program, about 95% of China’s growth in 2009 was attributable to investment, and almost all of the investment had come from the state. The percentage for 2010 will not be too far off of that.

Beijing’s plan, however, was good for private entrepreneurs who, although shut out of many portions of the economy by state enterprises, rode the resulting asset bubbles to even greater wealth. The number of the country’s high net worth individuals according to the China Merchants-Bain study will reach 585,000 this year, almost double the figure for 2008.
The emigration of China’s wealthy has, not surprisingly, triggered controversy. “We have been working hard to develop the economy in the past 30 years, but now these elite members of society are fleeing with the majority of the wealth,” said economic analyst Zhong Dajun to the Global Times, the Communist Party-run newspaper. “The loss may be even higher than all the foreign investment we have attracted. It is as if, when the time of harvest comes, we find the fruits have all gone to others’ baskets.” Zhong should not be shocked. Beijing, since 2008, has been targeting private entrepreneurs and abusing them even more than usual, so it is natural they are now trying to protect themselves from a rapacious state.

And the situation is bound to get even worse if Xi Jinping becomes the next Party general secretary at the end of next year, as just about everyone expects. Xi will undoubtedly bring his fellow “princelings” into positions of political power.
The princelings, descendents of former leaders of the People’s Republic, will surely use their new political clout to consolidate their grip on the economy. This means, among other things, that others, especially owners of private domestic enterprises, will have even fewer opportunities than they do today.

“We can only hope the rich people stay out of patriotism,” says Xia Xueluan of Peking University. Patriotism, these days, may be the only thing keeping Chinese entrepreneurs in China. And, from the look of things, it is not enough. The country’s wealthy are going on shopping tours for U.S. real estate and, if they have not done so already, are moving their families abroad. There has, in the last five years, been a 73% increase in Chinese investment immigrants to the United States. Countries, like Canada, are raising their minimum investment requirements for investment-immigrant candidates due to the sheer size of the tide of Chinese cash.
Chinese cash is largely responsible for the third wave of buying from Asia into Vancouver. In an “unprecedented” surge of business for brokerages in that city in February, Chinese buyers snapped up homes, townhouses, and condominiums as sales skyrocketed 70% over the preceding month.
As foreigners pour into China, China’s entrepreneurs are taking their money out. Which group do you think knows more about what is going on?

Sunday, September 4, 2011

This article appeared in the September 4, 2011 Knoxville News-Sentinel

The president has threatened to deliver a speech after Labor Day outlining his program for jobs. If he is true to his muse, it will advocate a bigger stimulus package — the other ones being too small.

But of course it will because there is no way such a package would be approved in the House and it is doubtful that it could find 60 votes in the Senate. So he will call it a jobs package.

Of course, he could advocate more temporary measures such as a cut in the payroll tax. But temporary measures have little effect on either consumer or business spending patterns and as a consequence have little impact on the overall economy.

Instead of advocating measures that would have a real impact on jobs, productivity and economic growth, such as a rollback in personal and corporate tax rates, a moratorium on the implementation of health care "reform," and decreasing regulatory burdens, we likely will see the president's continued infatuation with big government spending.

Look for a renewed push to create "green" jobs and for a massive increase in infrastructure spending. These types of spending appeal to the president and his supporters. It has been well documented that green job spending is mostly wasteful and makes little sense economically. It also is true that the allure of infrastructure spending is a siren's song — one that is difficult to resist but which will inevitably end up with a bad result.

The first stimulus program created few permanent jobs and is generally considered as a failure. So look for the president to try to call a new stimulus program a different name — infrastructure. This too will be a failure.

Consider the case of Japan, which in the 1990s initiated an expansive infrastructure program. Some observers have credited the decline in the Japanese economy directly to its squandering billions of yen on wasteful projects. The Japanese also forgot that such projects also would need billions to be spent on upkeep lest they fall into disrepair.

The Japanese economy declined as government spending increased. Indeed, there is a parallel in this country. When the president was elected, he had sizable majorities in both houses of Congress. Together they initiated an unprecedented expansion of government spending.

If increases in government spending were supposed to foster economic growth and job creation, Japan would be booming and we would be better off today than in 2008. That we are significantly worse off is a repudiation of those who would advocate more government spending as a solution.

Again, such policies do not stimulate growth but rather serve to deter it. We have learned our lesson. The question is has the president?

Thursday, September 1, 2011

All of a sudden, black democratic members of the congressional black caucus are focusing on the tea party as being racist. First Maxine Waters (D-CA) told a group that the tea party can go to hell. Then Andre Carson (D-IN) said that tea party members of the house of representatives said “Some of these folks in Congress right now would love to see us as second-class citizens. Some of them in Congress right now of this tea party movement would love to see you and me ... hanging on a tree." The news has misreported this saying that Carson said that the tea party wanted blacks to be lynched. No. Carson explicitly says that its members of congress who want this. Where is the outrage? Carson is obviously ignoring the two black republicans just elected with tea party backing, Alan West (R-FL) and Tim Scott (R-SC). We all know about West, the colonel who was forced to resign because he threatened to kill an Iraqi terrorist unless he told where fellow snipers were located. Tim Scott is noteworthy because he defeated the grandson of Strom Thurmond in the republican primary. What Waters and Carson are doing is firing the first salvos in what is going to be an ugly race war in the upcoming presidential election. What the democrats have obviously decided to do is that since Barack Obama cannot run on his record, what will be done is to conduct an ugly campaign based on class envy and on race. When Carson was asked about his comments, he would not relent. His spokesman said that Carson “believes the tea party caucus in the House is seeking to protect millionaires, oil companies and tax cuts for the wealthy at the expense of funding for "child nutrition, Head Start, job training and job creation. The tea party policies are devastating, Carson believes, for those at the low end of the economic scale.” This is not only race warfare but class warfare as well. Would anyone be surprised that the result of such a campaign will be the further exacerbation of the divide between black and white that exists in the country? It is only a miracle that there has been little violence motivated by such comments. It makes little difference that there are black conservatives and black members of the tea party. I have spoken at several tea party rallies. The tea party is not racist. It arose because of the fear of increasing government interference in our lives, the increased government spending, the deficits and the irresponsible increase in the national debt. If these had grown during any administration, it would have give birth to the tea party. That the current president is black is irrelevant. He happened to have been the democratic nominee and any democrat could have beaten John McCain. The only good thing about the election of Obama is that he saved us from another President Clinton. Be forewarned, this is merely a preview of the presidential campaign. The apparent democrat strategy is to make this a black versus white, rich versus poor campaign hoping to appeal to white guilt. The democrats have already lost white men but trying to convince white independents that a vote against Obama is a vote for racism and "millionaires and billionaires" is apparently their only hope for victory.

About Me

Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com